Tuesday, June 16, 2009

Cohan on Bear Stearns

If you were to put together a syllabus on the current financial uproar, I suppose House of Cards by William D. Cohan would have to be on the list. But it won't necessarily make you happy.

I mean no disrespect to Cohen, whose account of the collapse of Bear, Stearns is crisp, informed, and plausible. The trouble is that I can't remember a book where there were so many characters who were so hard to love. Perhaps I shouldn't be too surprise: these are, after all, bankers, and their primary purpose on the planet is making money. But they are also bullies, blowhards, egomanics, paranoid narcissists and a whole lot of other things that you wouldn't want your daughter to bring home from the fair.

They are also, I suppose, people of some talent. At least it seems they must be: banking is, after all, a fiercely competitive business, demanding (it seems) critical acuity, informed good judgment, and a limitless appetite for information. But the matter is something of a mystery. I don't mean to suggest that skilled and talented people must also be nice people, but it is hard to imagine who such a parcel of puffed-up toads could really be good at what they do. And yet they did run the value of Bear Stearns up into the $170s (per share) before it aw faw down.

Cohan sets it all forth in two parallel stories. One is an exhaustively detailed ticktock of the last few days as Bear gurgled hideously down the drain. It's masterfully done, although you do have to remind yourself every so often just why you should care about all these people. The other story is a full account of the 60-70 year back-story. I liked both parts,but I must say I found this back-story more absorbing in that it offers the best account I've ever read of just what it is people do in a big bank (and note to self, go back and read Cohan's earlier book about Lazard Frères, the investment bank.

If there is a central villain in the piece, I suppose it is Ralph Cioffi, who structured the hedge funds that loaded up on subprime--the collapse of which funds led to the ultimate collapse of the firm. Cioffi (who, I suspect, did not cooperate with Cohan) appears to bear all the earmarks of a good salesman: insane optimism, poor impulse control, and a knack for manipulation. Fine: any institution that is going to make any money has to put up with at least a few of these guys. The point is that you keep them cabined in; surround them with a net of bean-counters, auditors, and execution clerks who save them from the full consequences of their own megalomania. The real flaw in Bear Stearns seems to be that nobody knew how to do it and so Cioffi drove the bus off the cliff.

[Or so it seems from Cohan's telling: I gather that Cioffi is still under indictment and heaven knows what evidence may emerge at trial. But if it is anything like the story that is told here, then we can only hope that he'll be pounding rocks for a long time].

Try to explain this kind of thing to the intelligent nonspecialist and you don't get very far before the listener says--hey, wait a minute who let this happen? Aren't there any grownups in this playpen? I suspect the best answer is that this sort of thing happens when everybody is making too much money. People must have known that Cioffi was out of control. Yet my guess is that as you surf from bonus to bonus, you just enjoy the good times and hope that the large, gloppy mass of brown stuff will simply wind up in the face of somebody else. Probably a good general insight into the whole misfortunate chronicle of these last few years.

1 comment:

Anonymous said...

To me, the real reason for this collapse is simple - from the middle management through the top ranks, everybody could double or triple their pay by taking extremely risky positions which were almost guarranteed to blow up the firm in the next recession.

But they didn't care, because they'd have pocketed from several million to several hundred million dollars in that time, and they weren't liable for the collapse.

In short, people were paid short-term and big-time for decisions which would have long-term consequences. It's like you paid the guys running a farm big monthly bonuses for 'productivity'. It wouldn't be surprising if harvest time found nothing, because they had hollowed out the farm.